Does a Construction Contract Require A Final Account Clause?

Section 110 of the Housing Grants, Construction and Regeneration Act 1996 (“the Construction Act”) requires every construction contract to provide an adequate mechanism for determining what payments become due under a construction contract and a final date for when those payments are to be made.

If it is determined that the payment terms are inadequate, The Scheme for Construction Contracts (England and Wales) Regulations 1998 (“the Scheme”) implies in relevant, adequate contractual terms. For example, paragraph 5 of part II of the Scheme states that the final payment payable under a construction contract (i.e. the payment equal to the difference between the contract price and the aggregate of any previous payments) is to become due either 30 days after the completion of the work, or on the making of a claim by the contractor (whichever is later).

Generally, construction contracts include some method for a final payment to be made to a contractor when works are completed. This final payment is usually made at the end of the defects liability period, taking all matters into account, and is often referred to as the final account.

In the recent case of JSM Construction Ltd v Western Power Distribution (West Midlands) PLC [2020] (“JSM v WPD”), it was considered whether the Construction Act’s statutory requirement for an adequate payment mechanism implies the need for a final account term in a construction contract and, if there is no such express term in the contract, whether it will be implied in through the Scheme.

In JSM v WPD, there was an ad hoc agreement to undertake works for a tender sum of £3,981,406.74 plus variations and extras. The agreement contained a mechanism for interim payments but did not have any specific mechanism for the final account payment. When the works concluded, the contractor made a final application for payment which was not based on the original tender price but rather by taking all matters into account and using a re-measurement of the works (i.e. a final account application). When the application was disputed by the employer, court proceedings were commenced by the contractor. In response, the employer applied for the claim to be struck out on the basis that the contract had no allowance for this kind of final account payment, so the claim was doomed to fail. The court’s judgment was the determination of that strike out application.

The employer argued that the parties had agreed a lump sum contract that allowed for monthly invoices to be raised proportionate to the actual progress of the works. It was noted that, while there was no final account provision, section 110 of the Construction Act does not specifically require one and some standard form contracts (such as the NEC3) do not include such a term. Accordingly, the employer argued, the absence of a final account provision did not render the contract inadequate for the purposes of the Construction Act and the Scheme’s provision for final payments did not need to be implied into it.

The contractor contended that the contract was inadequate because there was no final account provision and that the Scheme offers examples of what is required to comply with the Construction Act. Further, that it is customary for construction contracts to include such a term. It was acknowledged that the NEC3 did not contain such a term, but the new NEC4 contract does, along with JCT contracts.

The judge determined that the wording of the Construction Act does not strictly require provision for a final account, but rather a broader requirement that the payment mechanism is adequate for the payments that are due under the contract, which is a question of fact. An example given was a fixed sum contract payable by five equal stages; while the fifth payment is technically a final payment, it does not require any different valuation or mechanism. In such a case, a contract need not include a separate clause. It is for the court to make a value judgment based on the facts.

In this case, the judge considered that the type of contract was essentially a kind of lump sum agreement, so the simple stage payment based on value of work undertaken was likely sufficient. Obtaining valuations or calculating extra costs may be inconvenient under the contract, but it is not for the court to make good a bad deal.

In this instance it was not up to the court to determine the substantive, fact sensitive dispute. As it was a hearing to determine the strike out application, the judge was simply satisfied that the court could not be certain that the contractor’s application was doomed to fail as the employer argued. Accordingly, the strike out application was dismissed.

What this case does tell us is that not all construction contracts will necessarily need to include a separate final account clause to be adequate in the eyes of the Construction Act. But there does not seem to be a hard and fast rule as to which contracts will require one and which will not.

If you have any queries in relation to the payment provisions in your construction contract contact our construction team.